The Russell 2000’s Resurgence
The Russell 2000 index has seen a remarkable surge of 20% in 2026, marking its best performance since 2003. This uptick in the small-cap index has been largely driven by the growing interest in artificial intelligence (AI) spending, which has expanded beyond the mega-cap technology companies to include smaller companies positioned to benefit from the massive buildout of AI infrastructure.
The Russell 2000’s gain is particularly noteworthy, as it has outpaced the S&P 500’s 11% climb and the Magnificent 7 group of mega-cap AI leaders’ 4% advance. This shift in market leadership has seen small-cap stocks take center stage, with the Russell 2000 index on pace for its strongest annual performance since 2003.
AI Exposure Trumps Current Earnings
According to data from HSBC, the current small-cap rally has turned traditional investing logic on its head. Historically, profitable companies have tended to outperform weaker businesses over time, as earnings provide a foundation for valuation. However, since mid-2025, the opposite has occurred within the Russell 2000.
HSBC’s data reveals that unprofitable companies have outperformed profitable peers by a wide margin. Companies with negative earnings per share (EPS) have seen a 154% gain since mid-2025, dwarfing the 34% return of their profitable counterparts.
This trend is not unique to the Russell 2000. A broader analysis of small-cap stocks shows that companies with exposure to AI are being rewarded, even if they are not yet profitable. This is a significant shift in market sentiment, as investors are now placing a premium on companies that could become important suppliers, service providers, or infrastructure builders in the AI economy.
From AI Exposure to Revenue Growth
While AI exposure alone does not guarantee success, small-cap companies must convert their infrastructure positioning into revenue growth and profitability to justify stretched valuations. This requires a clear path from AI demand to revenue growth, improving margins, and eventual profitability.
Smart investors should focus on companies that can turn today’s AI opportunity into tomorrow’s earnings. The rally may be broadening, but profits still matter. A business connected to AI infrastructure is not automatically an AI winner.
The best long-term investments will be the small companies that can turn today’s AI opportunity into tomorrow’s earnings. The Russell 2000’s 20% gain in 2026 reflects a major change in market leadership, and small-cap stocks are benefiting as investors look beyond the Magnificent 7 and search for the next layer of AI beneficiaries.
The Rise of Small-Cap Winners
The strongest-performing small-cap stocks have been technology and infrastructure companies connected to AI spending. This is because AI requires physical expansion, and companies building the tools and infrastructure needed to support rising AI workloads are seeing investor interest even when current earnings remain negative.
The market is effectively betting that today’s losses represent investment ahead of future demand. This resembles earlier technology cycles, where investors often valued future market opportunities before companies produced consistent profits.
The four largest cloud providers – Microsoft, Amazon, Alphabet, and Meta Platforms – continue committing hundreds of billions of dollars toward AI infrastructure. Smaller suppliers connected to that spending are benefiting from the ripple effect.
The Risk Behind the Rally
Granted, investors should not confuse AI exposure with automatic success. A company losing money today still has to eventually produce profits. Rising valuations based on future expectations can create painful corrections if growth slows or AI spending does not translate into stronger financial results.
The 154% gain for unprofitable Russell 2000 companies since mid-2025 shows how aggressively investors are pricing in future opportunity. It also shows how much optimism is already reflected in some valuations.
Smart investors should focus on the companies with a clear path from AI demand to revenue growth, improving margins, and eventual profitability. A business connected to AI infrastructure is not automatically an AI winner.
In short, the Russell 2000’s 20% gain in 2026 reflects a major change in market leadership. Small-cap stocks are benefiting as investors look beyond the Magnificent 7 and search for the next layer of AI beneficiaries.
HSBC’s data shows the market is currently rewarding AI exposure more than current earnings, with unprofitable small caps leading their profitable peers.
